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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to Safehold's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.
At this time, for opening remarks and introductions, I would like to turn the conference over to Jason Fooks, Senior Vice President of Investor Relations and Marketing. Please go ahead, sir.
Thank you. Good morning everyone and thanks for joining us today for Safehold’s earnings call. With me today are Jay Sugarman, Chairman and Chief Executive Officer; Marcos Alvarado, President and Chief Investment Officer.
This morning, we plan to walk through a presentation that details our second quarter 2019 results. The presentation can be found on our website at safeholdinc.com and by clicking on the Investor Relations link. There will be a replay of the conference call beginning at 12.00 P.M. Eastern Time today and the dial-in for the replay is 1-800-585-8367 with a confirmation code of 9345669.
Before I turn the call over to Jay, I'd like to remind everyone that statements in this earnings call, which are not historical facts, may be forward-looking. Our actual results may differ materially from these forward-looking statements, and the risk factors that could cause these differences are detailed in our SEC reports. Safehold disclaims any intent or obligation to update these forward-looking statements, except as expressed or required by law.
Now with that, I'd like to turn the call over to Chairman and CEO, Jay Sugarman. Jay?
Thanks Jason. We continue to make excellent progress during the second quarter, setting a sub for a strong second half of the year. Core metrics advance with revenue up 70% year-over-year, earnings per share up over 80% year-over-year, and a quality of our pipeline continuing to increase. Our message is clear and simple, the Safehold ground lease enables building owners to be more capital efficient and more cost efficient enabling them to achieve higher returns with lower risk.
Making a very large industry more efficient and delivering a better customer experience and better customer results, it's been a consistency in for some of the biggest and most successful companies in the country, and we believe we can join their ranks by delivering a nationally scale professionally managed platform that focuses on reinventing the ground lease industry and meeting the needs of today’s real estate owners in a way never done before.
Based on what we’ve seen over the first half of the year, we feel confident that the message is breaking through, and as a result, we are raising our investment guidance to $1 billion for 2019, a 33% increase from our guidance at the beginning of the year. We hope to keep expanding to all of the top 30 markets in the country and look forward to locking down many of the deals in our pipeline to demonstrate the range of our capabilities.
And while we’re very focused on growing the investment side of our business, we are also importantly continuing to refine our capabilities on the capital side of the business, raising more efficient debt to fund our portfolio and expanding the number and type of equity investors that we think we’ll be attractive to what we are building.
We believe the combination of principle safety, premium asset returns and the sizable capital gains potential embedded in our stock will prove attractive to a wide range of investors well beyond the real estate world and we’ve begun planning to share with them our story as it reaches scale.
With that, let me turn it over to Marcos to go through the quarter in more detail. Marcos?
Thank you, Jay, and good morning everyone. Let me start with Slide 4. Second quarter of 2019 was highlighted by strong year-over-year earnings growth of 237%, as Safehold continues to gain traction with customers and penetrate a significant market opportunity. As Jay mentioned, we’re raising our investment target from $750 million to a $1 billion. Additionally, we’ve continued to improve the right side of our balance sheet as we’ve recently closed on several assets financing that have meaningfully extended our debt maturity profile along with increasing the commitments on our revolving credit facility by a $100 million.
Slide 5 summarizes our earnings results. Revenues for the second quarter of this year jump to $20 million, a 70% increase from the same period last year, while quarterly earnings per share grew 88%. At the end of the quarter, our aggregate portfolio stood at $1.1 billion and the unrealized capital appreciation in our own residual portfolio representing the value of the bricks and mortar sitting on top of our land, grew to $2.2 billion, a 60% increase from the same period last year.
Slide 6 is a review of our investment activity. During the second quarter, we signed up five new Safeholds totalling a $186 million of which $43 million closed during the quarter. The balance is signed committed and expected to close in the coming weeks. You can see the key investment metrics on these transactions on the bottom half of the slide, which are consistent with our strategy of creating AAA equivalent risk. These assets have a 5.7% effective yield with a 3.6 times coverage and a weighted average gross book value representing 39% of combine property value.
Moving to Slide 7, we illustrate the growth of our pipeline. As we continue to gain momentum, our pipeline is growing nicely. We’re encouraged by the deal flow we’re seeing as we expand into markets reaching new high quality customers and educating them on the Safehold value proposition. This growth in our pipeline has given us the confidence to increase our full year investment target by $250 million to $1 billion assuming the economic conditions to remain consistent with today. You can see some of the key metrics associated with our pipeline on the slide that are consistent with our existing portfolio.
Slide 8 provides a summary of our debt. We continue to improve the right side of our balance sheet to help facilitate the scale of Safehold. During the second quarter and subsequent to quarter end, we closed $287 million of long-term debt across five separate non-recourse financings customized to the unique characteristics of our Safehold’s. The combined weighted averages of the financing this quarter have an initial cash interest rate of 3.1% and a 4.2% interest rate over the term of the debt which has a weighted average maturity of 38 years. As it stands today, we have approximately $600 million of debt outstanding.
Based on our recent activity, we have extended our weighted average debt maturity from seven years at the end of the last quarter to 23 years, getting us a clear runway with no mortgage maturities for eight years. Presently, our debt has a 3.5% weighted average cash interest rate and weighted average interest rate of 4.1% over the term of the debt. Leverage stands at one times debt-to-equity. Subsequent to the quarter end we expanded our bank group and upsized our revolver capacity by a $100 million to $450 million to supplement the growth of our franchise as our outlook is currently undrawn.
Moving to Slide 9, during the second quarter, the unrealized capital depreciation on our own residual portfolio grew to $2.2 billion increasing nearly five folds since our IPO June of 2017. As a reminder this metric represents today estimated market value of the buildings on top of our land. In conclusion, it was a strong quarter underscored by solid remains, a larger pipeline, continued market penetration and an improved capital structure that should allow us to continue to scale the franchise.
We’re certainly pleased to see the stock performance over the last few months as we believe investors are starting to recognize the opportunity and growing momentum. That being said, we believe we are only in the early stages of what we’re building at Safehold. We will continue to educate a broad range of investors about the compelling combination of excess returns and growth embedded in our company.
And with, that I’ll turn it back to Jay.
Thanks Marcos. Let me just finish with a few finishing comments. We continue to believe we're at the beginning of an extraordinary opportunity to help modernize real estate ownership in this country. Our teams have been hard at work expanding our footprint and helping make Safehold the go-to-name wherever a value-enhancing ground leases needed. We look forward to telling our story and explain how are making the pipeline bigger approach and create compelling returns for our customers and for our shareholders.
Okay, operator, let’s go ahead and open up for questions.
Thank you. Today’s question-and-answer session will be conducted electronically. [Operator Instructions] Your first question comes from Anthony Paolone from JP Morgan. Your line is open.
Thank you and good morning. Just a couple of questions on the deal volume and deal activity first. The billion dollars that you’ve guidance up to, do you think that’s money that's actually spent this year? Or do you think that would be commitments as well?
Yes. I think Anthony, we’ve said in the past, we can’t control the timing, in fact we’ve had a couple of customers ask us to delay closings well beyond when we actually had a deal signed, sealed and delivered. So, we’re comfortable saying we will close and fund the billion dollars this year based on what we see in the pipeline today.
Okay. And these delays in terms of, is it just timing because the customer wants to just push it off a couple of months or for instance the volume that you give the $186 million quarter? Is that commitments that could take several quarters before the capital is actually put out the door?
Yes. No, two relatively idiosyncratic reasons but it saved our customers money to just delay them slightly, and we’re in a customer business. So, we were happy accommodate them.
Okay. And then how are yields holding up given what’s happen to interest rates the several months?
It’s a great question. Again, I think our goal is to deliver better returns with lower risk to our customers. We think there is a lot of cost efficiency and a lot of capital efficiency that gives us a pricing umbrella inside where alternative financing is available to our customers. So, we’ve seen a little bit of tightening in the overall financing markets, but probably not as dramatic as you’ve seen sort of base rates. We’ll see where the market goes but I think we continue to be a better alternative and loss of situations in our core kind of 3.5% starting rate, starting yield number. So, we’ve seen a lot of erosion in that yet.
Okay. And with the larger pipeline that’s emerging and stock has done well. How are you thinking about funding between equity and also having your capacity to get your target leverage level? And then the additional element here about is just how to think about iStar just consistent perks is of the equity and where that goes overtime?
Yes. Look, I think we started the year with sufficient capital to meet our original guidance, after that it’s all pretty much pipeline driven how fast the deals are closing, what’s the amount of volume. We do think and you heard both Marcos and I mentioned that scale is critical for our business. So we’re little less focused on exactly how thing come in quarter-by-quarter but we’re focused on reaching scale.
So, at least at this point, it’ll be driven by the closing of transactions. We continue to believe the stock represents compelling value and certainly a sensitive to that, but our end game here is to reach scale to be the dominant player and what is really revolutionary idea. So, we’ll see how the pipeline plays out that will dictate some of our capital decisions.
In terms of iStar desire to continue acquiring as much as Safehold as a canopy prices that is something that iStar’s board came to the conclusion this was one of the most attractive businesses it seem. It made the large investment in January and so long as the stock doesn’t reflect what we think is full value, they continue to be an interest acquire share.
So, it’s a relatively small amount in the open market, but they do have the right to participate up to their pro rata share of any future capital raises. So that will be the means through which we probably acquire speaking up to get them out in the future.
Okay and then just last question what you saw on the G&A popped up from 1Q to 2Q can you just comment on what that number it is likely to be around as sort of a run rate for the year?
Yes. Just in terms of the jump at our annual meeting our board members do receive a share grant that we expense in the quarter. So that’s not a recurring item and you’ll see that every year during around our annual meeting. Run rate I think you’re going to start to see it stabilize I think as we scale we get real economies of scale, so we don’t see G&A dramatically scaling with the business. But where it’s been on an annual basis is probably a good starting point.
So the 1Q number is probably a little bit more of the base line and 2Q just that happens once a year kind of thing?
Yes, but we will be, yes, we do make the director grants every year so that we should factor that in as -- and it’s a one-time event just spread it over four quarters, so you can add a quarter of that to the first quarter. And we do have legal cost as we continue to do R&D around the actual structures, we’re using. Again as we get bigger, we think a lot of those costs to become smaller and smaller. There is still a little bit of innovation cost that we’re incurring, things that we’re still learning how to do better make more efficient. But I think, if you look at the run rate over last 12 months, that’s probably a better way to think about than any individual quarter annualized.
Okay great thank you.
Your next question comes from Rich Anderson from SNBC. Your line is open.
Thanks good morning everyone. So on the financings the $287 million what was the range when you said 38 years on average how high did you get at the top end of that range?
50 years.
Okay and is that sufficient in your mind or could you see yourself going even higher it’s the opportunity presented itself?
The way we think about our financing is the cash flow yield as a maturity are so high, so whether it was 30 years of duration a 50 years of duration, we don’t think we have any real refinance risk. So that was an opportunistic execution of longer duration financing.
Okay. In terms of the escalators 55% are fixed with inflation adjustments call it 60% total fixed. Do you see that percentage of fixed bumped math going higher as a percentage of the total overtime?
We do. All of our newly created Safeholds have relatively consistent structure of a 2% annual bump, and so as we continue to scale our business with new originations and new Safehold, that will become a bigger piece of the portfolio.
Okay. Maybe one for Jay here, are there opportunities out there where you are purchasing an existing ground lease that is let’s call it sketchy and it’s structure some sort of landmark to market that create some problems for the leasehold that you can buy and restructure on behalf of the leasehold, and thereby really make your point drive your point home about how Safehold is attempting to sort of reengineer this industry, and kind of right where the rubber meets the road. Is that something that’s out there is a possibility in terms of the pipeline?
Yes. That’s excellent insight Rich, we have done that already on a smaller deals and we think it’s a tool that will become something we can use more often going forward as people start to understand the differences between these our kick ground leases and how inefficient they are in the modern capital markets versus what Safehold is doing. So, it's definitely a tool or tool box we’ve always been able to deploy the little bit so far but we definitely opportunities to do it on a bigger scale.
Okay, great.
Rich, the reverse increase from existing leasehold owners to about exactly what you’re talking about as dramatically picked up over the last six months.
Okay, good sign. When do you -- when are you willing to accept an effective yield or cap rates or a coverage ratio that’s below what one might think of that as you are your kind of targets? So coverage for the deals in the second quarter was below four -- I think 3.6, not making a big deal of that, but what is it about the deals that we’re announce that allowed you to accept a rent coverage that was somewhat below your targets?
Yes. I mean it’s a little bit idiosyncratic as you might suspect the variables are quality location, EPV percentage. We’re taking all those factors into account and try to make all of these become very attractive investments that UI and iStar and a shareholders that all like to own. But it's hard to tell you exactly what circumstance drive each individual pricing decision, but I can tell you when we close a deal, we feel like we have created a lot of value for shareholders, but that’s the most consistency I can give you.
But certainly higher quality gateway markets, we’re going to wanted to be a lot more thoughtful about how to crack that deal and it requires us to go a little higher in the CPV calculation or a little low in coverage, and that’s going to be sign depending on the other qualitative factors. We also have some assets that clearly we think have potential to continue to grow their revenue streams and maybe repositioning opportunities.
So, we’re looking at that set of variables and ultimately the conclusion has to be when we close this deal we think we’ve made significant value for shareholders that they enclose, and that’s really driving the business right now more than a set of rules that, Again the customer focused business, we do have core return parameters, but there are a lot of other factors in real estate as you know, and we’ve got a lot of experts in the field making those real time judgments.
Okay and then last quick question. Why did the book equity decline second quarter versus first quarter?
I’ll take a look at it but I think again we did have some one-time cost in the second quarter. I’d have to look further it Rich.
Not a big deal as if. It's something I noticed here. Okay thanks. That’s all from me.
Your next question comes from Marnie Georges from Raymond James. Your line is open.
Thanks good morning. First question from me. How should we be thinking about the type of different assets that you’ll be targeting in the pipeline in a go forward the multi-family versus the assets in industrial? For example just so how are you thinking about that?
This past quarter we closed our first student housing deal, which we’re excited about. When I look at the pipeline, it is consistent with the portfolio that exist today, a lot of office, a lot of multifamily, we sprinkled in a few student housing transactions as well and a hotel transaction, so, generally consistent, with the existing pipeline. I will tell you the quality of the assets and the quality of our customers has improved in the pipeline which is exciting for us as a franchise.
Awesome, that’s good to hear. And then just looking at MSAs, was there anything specific driving the decision going to the Oregon market this quarter? Are there any specific MSAs that you would be targeting in the near term or anything you’re looking to deepen your presence within?
Yes, Portland is a fantastic growth market we’re able to get our first deal done in Portland we actually have a franchise that’s in lending experience in that market so we’ll look to continue to grow in Portland as Jay mentioned we have a target of getting into the 30 major MSAs.
Great thanks.
To take off.
Definitely, and then one more from me just other income this quarter came in a little higher than we’ve been expecting. Was there anything to that or anything on a go forward that we should be aware of?
I wouldn’t think so there maybe some anomalies in there, but there shouldn’t be major changes in there.
Great thanks so much. I’ll turn it back over.
Your next question comes from Jade Ramani from KBW. Your line is open.
Thanks very much. I wanted to ask a specific question about the portfolio. The Park Hotel's assets, how soon would be reasonable to expect conversations to commence between Safe and the Park Hotel about potential renegotiation?
Hey Jade. We’re delighted with the performance of the portfolio, but we have not heard from the tenant. They do have a renewal rate, which will extend them out to 2035. And until it’s on their radar, it’s not really something we can push and drive, but we’re very happy with the performance of that asset.
And in terms of the economics that you’re currently, the Company is currently receiving from those assets. Is it just some base level of rent right now of I think approximately $13 million annualized? And if the negotiation was not successful it’s safe to see the entire amount of NOI that those properties generate?
Yes. Look those properties are making somewhere in the $30 million to $40 million, and our rent is I think $10 million base and the rest of the small percentage rented, it was about $3 million to $3.5 million last year. So, there is significant delta between what the properties make and what we get paid. And you usually, it creates an opportunity to have a conversation with the tenant, but it happen on the tenants time table. And each year as we get close to the maturity, we will start taking a very hard look at the alternatives available to them and frankly to us.
Okay. And in terms of pipeline can you give a sense for the average transaction size. Just given the originations that are been completed so far, I would assume that there is potentially some large outside transaction in there?
Yes. Look, we haven’t been shy about targeting some of the big bigger cities and some of the bigger assets. Again, they tend to be the ones that take much longer to get done, but we’re definitely made progress on that front. And as Marcos said, we’re penetrating some new product types by student housing that will have lower balances and multifamily to typically has been somewhat smaller, but feels good, leads after the first six months of the year good enough for us want to raise our guidance. So, you can tell we’re feeling positive that we’re making progress on those fronts.
Just on the refinancing to that you completed this quarter. What kinds of lenders participated in those? Where those foreign banks, insurance companies or some other lending type?
Yes. We’re exploring, as I said we’re trying to make the right side of the balance sheet as efficient as possible as well. So, we’re exploring conversations with a wide range of lenders. I think the life company world is certainly one that understands the product so that’s been a good place to go, but we will continue to probe a wide range of providers of capital, because we think this ultra safe credit profile is one that’s attractive to lot of people.
And just last question. Can you specify what the going in cap rate is on the $186 million of deals that you put under contract this quarter?
Yes. I mean our model is mid three, year one yield mid five, return on asset effectively IRRs they were all pretty consistent with that.
Thank you.
[Operator Instructions] Your next question comes from John Massocca from Ladenburg Thalmann. Your line is open.
Can you just provide some additional color on the acquisitions closed or brought under PSA in the quarter? You gave some detail earlier on property side and transaction size, but maybe with regard to location beyond the Portland transaction? And also specially how are these acquisitions being sourced how many are Safe ground leases versus maybe purchase the existing ground leases?
They’re all Safehold so nearly created, as we mentioned student housing asset. First asset in Portland, there’s a brand new multifamily in the Orlando market, office building in the New York City MSA and an office building in Austin, Texas. So, all great markets, great quality assets.
Very helpful, and then maybe you can give us some additional color on trends with various rent coverage in existing portfolio that was kind of in place at the beginning of the quarter? It seems like the overall coverage declined a little bit by kind of 0.2 turns. Some of that probably was the initial acquisition you made, but is the great thing that was going on in the existing portfolio?
No, the existing portfolio is performing consistent with our expectations. It was the new acquisitions that were at slightly lower covered that pull that down.
And I always kind of mentioned it too because the number of assets for the over 5x coverage came down by 8%. It seems like bigger than maybe what could be explained by the two transactions or anything kind of a super kind of high coverage range that had tenants underlying income covering your rent come down a little bit?
No, but we’ll double check.
Okay, that’s it from me. Thank you very much.
Mr. Fooks, we have no other questions.
Okay, great. So, if anyone else should have any additional questions on today’s earnings release, please feel free to contact me directly. Jacqueline, would you please give the conference call replay instructions once again. Thanks.
Thank you for participating in today’s Safehold’s second quarter 2019 earnings conference call. This call will be available for replay beginning at 01 PM Eastern Standard Time today through 11:59 PM Eastern Standard Time on August 9, 2019. The conference ID number for the replay is 9345669. Again, the conference ID number for the replay is 9345669, and the number to dial for the replay is 1800-585-8367, again 1800-585-8367.
This concludes today’s conference call. You may now disconnect.